What goes into a development feasibility appraisal

TL;DR

• A feasibility appraisal answers one question: does this scheme make enough profit to justify the risk, and what can you afford to pay for the site?
• The standard tool is the residual land value method: take the finished value (GDV), subtract every cost including your required profit, and what is left is the most you can pay for the land.
• The core inputs: GDV, build costs, professional fees, finance, contingency, statutory costs (planning, CIL/S106), sales and disposal costs, and developer profit.
• Profit is usually expressed as a margin on GDV (a common target is around 15–20% on GDV, deal-dependent) or as a return on total development cost.
• The worked scheme below uses illustrative round numbers to show the mechanics, not market rates. Replace every figure with your own before relying on it.

Before you buy a site, exchange on a conversion, or commit to a build, you run a feasibility appraisal. It is the model that tells you whether the project clears your profit hurdle and, just as importantly, the maximum you can pay for the land and still hit that hurdle. Done properly it is the single most valuable hour in the whole project, because it is the cheapest place to discover a deal does not work. Here is what goes into one.

This is general information, not investment advice, and every number below is an illustrative example chosen to show how the appraisal fits together.

The shape of the appraisal: residual land value

Most development appraisals are built around the residual method. The logic is simple even if the inputs are fiddly:

GDV − (build costs + fees + finance + contingency + statutory costs + sales costs + developer profit) = residual land value

In other words: start from what the finished scheme is worth, strip out everything it costs to build and sell and the profit you require for taking the risk, and whatever is left is the most you can rationally pay for the site. If the residual land value comes out below the asking price for the plot, the deal does not work at your profit target, and you either negotiate, redesign, or walk. That last sentence is the entire reason the appraisal exists.

Input 1: Gross Development Value (GDV)

GDV is what the completed scheme sells or values at. For a residential development it is the sum of the expected sale prices of every unit; for a build-to-rent or HMO scheme it can be an investment value derived from the income. Get this from comparable sales of completed, similar units in the same location, not from optimistic agent appraisals or the one record price down the road.

GDV is the number that moves the model most: because every cost and the profit are often expressed as a percentage of it, a 5% error in GDV ripples through the entire appraisal. Build it from real comparables and, if anything, be conservative. The comparables tool helps you anchor it to evidence.

Input 2: Build and conversion costs

The cost to actually construct or convert. For new build this is usually a rate per square metre of gross internal area; for a conversion it is a priced schedule of works. This line should include:

• The main construction or conversion cost.
• Demolition and site preparation, abnormals (sloping sites, poor ground, services diversions, remediation).
• External works: drainage, landscaping, parking, boundary treatments.

Anchor the per-square-metre rate to a real source rather than a guess; the build cost estimator gives a starting range, and our UK build cost guide explains how regional multipliers and quality tiers move it. Abnormals are where optimistic appraisals die, so price the ground before you price the profit.

Input 3: Professional fees

Design and consultant fees are a real, sizeable line, commonly modelled as a percentage of build cost. They include architect, structural and M&E engineers, planning consultant, quantity surveyor or cost consultant, project manager, and surveys (measured, topographical, ecology, arboricultural, contamination). On a complex planning site the consultant bill is not trivial, and front-loaded before any income arrives.

Input 4: Statutory and planning costs

The costs that come from the planning system rather than the build:

• Planning application fees and pre-application advice.
• Community Infrastructure Levy (CIL) where the council charges it: a per-square-metre charge on new floorspace that can be a major line on larger schemes, and the rate varies by local authority.
• Section 106 obligations: affordable housing contributions, highways works, or other negotiated planning gain.
• Building Regulations and other consents.

Whether a site even has a viable planning route is the threshold feasibility question. Run it through the planning check and, for a fuller view, the site feasibility tool before you spend money on a full appraisal.

Input 5: Finance costs

Development finance is rarely cheap, and it is charged while the scheme produces no income. Model:

• Interest on the development facility, typically drawn down in stages as the build progresses and rolled up rather than serviced monthly.
• Arrangement, exit and broker fees on the facility.
• The cost of your own equity tied up for the duration, which has an opportunity cost even if it does not appear on a bank statement.

Finance cost is driven by the build programme length: a scheme that overruns by six months pays six more months of interest on borrowed money while earning nothing. That is why the programme is a financial input, not just a construction one.

Input 6: Contingency

A percentage held back against the unknown. Conversions and groundworks throw up surprises, materials and labour prices move, and programmes slip. A contingency line is not padding; it is an acknowledgement that the other numbers are estimates. Omitting it does not make the risk disappear, it just hides it until it arrives as a cost overrun.

Input 7: Sales and disposal costs

Getting the finished units sold or let costs money: estate agent and marketing fees, legal fees on disposal, and any incentives needed to move the last units. For a scheme held and refinanced rather than sold, the equivalent is the refinance valuation and the costs of that finance event.

Input 8: Developer profit

This is not what is left over; it is an input you set before the residual is calculated. Developers require a profit margin to compensate for the risk of the scheme, and lenders expect to see one too. It is commonly expressed as a percentage of GDV (a frequently-cited target sits around 15–20% on GDV, though the right figure is entirely deal-, risk- and market-dependent) or as a return on total development cost. Setting the profit requirement is what turns the appraisal from a cost summary into a decision tool: it is the hurdle the residual land value has to clear.

Worked example: an illustrative small residential scheme

Round numbers, purely to show the mechanics. A small scheme of finished units with a GDV of £1,200,000:

The appraisal says: at a 17% profit-on-GDV target, the most you can pay for this site is about £218,000, before the SDLT and acquisition costs on the land purchase itself. If the plot is on the market at £300,000, the scheme does not clear your hurdle at that land price. Your levers are then clear: push GDV (only if comparables support it), cut build cost (without cutting the saleable product), reduce your profit requirement (accepting more risk for less reward), or negotiate the land down. There is no fifth option that the maths invents for you, which is exactly the discipline the appraisal is for.

How sensitive is the answer?

The residual is a small number sitting at the end of several large ones, so it swings hard. A 5% fall in GDV (£60,000 here) comes almost entirely off the residual land value, not off your profit, because profit is a fixed input. That sensitivity is the single most important thing to understand about an appraisal: small errors in GDV or build cost become large errors in what you can afford to pay. Always run the appraisal at a pessimistic GDV and an elevated build cost, and see whether the land still pencils.

FAQ

What is the difference between GDV and profit?

GDV is the gross value of everything the scheme produces when finished and sold or valued. Profit is your reward for the risk, set as an input (often a percentage of GDV) and subtracted as a cost in the appraisal, so that the residual land value already protects your margin.

What is the residual land value method?

It is the standard way to value a development site: take GDV, subtract all development costs and your required profit, and the remainder is the maximum you can rationally pay for the land. If it is below the asking price, the scheme does not work at your profit target without changing something.

What profit margin should a development make?

There is no fixed rule, and it depends entirely on the scheme's risk, the market and your cost of capital. A commonly-cited target is roughly 15–20% profit on GDV, but treat that as a starting reference to pressure-test, not a guarantee or a regulation.

Why does contingency matter so much?

Because every other number in the appraisal is an estimate. Groundworks, conversions and long programmes routinely cost more than first priced. A contingency line acknowledges that uncertainty; leaving it out does not remove the risk, it just hides it until it lands as an overrun that eats your profit.

Before you commit

A feasibility appraisal is not paperwork you do after deciding; it is the decision. It tells you whether the scheme clears your hurdle and the maximum you can pay for the site to keep it there. Build it from real comparables, price the abnormals, set your profit before you take the residual, and stress it for a weaker market. Start with the site feasibility tool to sanity-check the planning and development picture, anchor your GDV with the comparables tool, and for an end-to-end appraisal from purchase to exit, the feasibility wizard walks the full model so the residual land value falls out at the end.